Apr-24 core sector bounces to 6.2%, helped by low base effect

1 Jun 2024 , 03:24 PM

CORE SECTOR GROWTH BOUNCES TO 6.2% IN APRIL 2024

The monthly core sector growth numbers are always reported with a lag of one month. For instance, the core sector growth for April 2024 gets reported at the end of May and the core sector for May 2024 will get reported at the end of June 2024. The cycle goes on that each month. Why is the core sector so critical in the overall macroeconomic analysis? The core sector captures the output performance of 8 of the most important infrastructure industries that form the building blocks of the economy. The core sector comprises of 8 building blocks of the Indian economy viz. coal output, crude oil, refinery products, natural gas, fertilizers, steel, cement, and electricity. These 8 sub-sectors combine to form the core sector basket and it has a 40.27% weight in the IIP. That is the reason, the core sector sets the tone for the IIP growth and also for overall GDP growth.

The core sector growth, as we shall see later, is reported on a YOY basis and also on a MOM basis. While the YOY figure is what you get to see regularly, the MOM figure is critical in understanding the high frequency trends in core sector. Over the last one year, it is coal and electricity that have driven core sector growth, although we now see signs of natural gas also joining the fray. The power sector has been working overtime to meet growing demand and coal sector has been working overtime to feed coal stocks to the power companies. A scorching summer this year has meant unrelenting demand for power and coal. In April 2024, electricity led the way with 9.41% growth followed by natural gas output growing at 8.6%. The other significant contributors to the core sector growth in April 2024 were coal at 7.51% and steel at 7.10%. Let us now turn to the FY24 story.

CORE SECTOR REVISIONS IN APRIL 2024

Before we get into the core sector revisions, a quick word on the cumulative core sector growth for FY25. Since there is just one month data available, the cumulative growth is really not relevant. One important thing to know about core sector growth is its value as downstream value creator. Since the core sector represents the infrastructure sector, growth in sectors like electricity, steel and cement have deep downstream effects and a multiplier effect on growth that is more than 1. That is why core sector assumes so much importance from a macroeconomic standpoint for India. Let us now turn to revisions.

Each core sector number goes through 2 revisions. The first revision happens after a month and the final revision happens after 3 months. Let us look at how the revisions panned out for core sector growth. The first revision for March 2024 raised core sector growth by 80 bps from 5.20% to 6.00%. The final revision for January 2024 upped core sector growth by just 3 bps from 4.06% to 4.09%. This bodes well for Apr-24 numbers; as it increases the prospects  of the April number also being upgraded.

BREAKING DOWN THE APRIL 2024 CORE SECTOR GROWTH

The table below captures the breakdown of the 6.15% core sector growth into the 8 components. Out of the 8 core sectors, only 1 sector (fertilizers) reported negative core sector growth with the other 7 sectors reported positive growth. That is a good ratio.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
Apr-23	4.57	9.14	-3.55	-2.86	-1.50	23.54	16.56	12.36	-1.12
May-23	5.23	7.23	-1.94	-0.33	2.78	9.71	11.96	15.92	0.83
Jun-23	8.37	9.76	-0.56	3.48	4.58	3.44	21.31	9.95	4.22
Jul-23	8.55	14.95	2.06	8.92	3.56	3.29	14.92	6.89	7.95
Aug-23	13.42	17.89	2.15	9.95	9.49	1.79	16.35	19.74	15.31
Sep-23	9.44	16.03	-0.36	6.57	5.55	4.21	14.79	4.75	9.87
Oct-23	12.67	18.41	1.31	9.93	4.24	5.35	13.61	16.98	20.34
Nov-23	7.94	10.90	-0.40	7.60	12.44	3.36	9.77	-4.79	5.73
Dec-23	5.05	10.75	-1.03	6.59	4.04	5.85	8.28	3.81	1.23
Jan-24	4.09	10.57	0.70	5.52	-4.29	-0.56	9.19	4.04	5.67
Feb-24	7.08	11.61	7.88	11.26	2.64	-9.51	9.08	9.06	7.54
Mar-24	6.00	8.71	2.02	6.32	1.55	-1.28	6.44	10.58	8.65
Apr-24	6.15	7.51	1.65	8.60	3.94	-0.75	7.10	0.62	9.41

Data Source: DPIIT (Department for Promotion of Industry and Internal Trade)

The table above provides the core sector growth trend for the 13 months from April 2023 to April 2024. The positive momentum has been sustained since March 2023; barring some minor aberrations in the trend; but these were largely on account of the base effect. That explains why the full year core sector growth stood at a robust level of 7.60% for FY24. The core sector numbers of January 2024 and February 2024 have seen first upward revisions; and the same is true for March 2024 also, which saw an 80 bps upgrade to growth. That bodes well for April core sector numbers. Unlike the previous month, the April 2024 core sector growth made the best of a low base to improve on YOY growth.

Out of the 8 core sectors in April 2024, 7 sectors showed yoy positive growth traction in March 2024; with only fertilizers showing negative growth. Refinery products have a weight of 28.04% in the core sector basket, so the impact of the 3.94% growth got magnified in the April 2024 overall core sector numbers. Fertilizer weakness has come from slackening momentum in agricultural output after the end of Rabi season. Cement growth has been tepid at 0.62% and that could be largely explained by many construction projects being put on hold on account of the ongoing elections.

HIGH FREQUENCY CORE SECTOR GROWTH (APRIL 2024)

The yoy growth captures point-to-point growth, but misses out on high frequency trends. That is because the yoy growth is too sensitive to the base effect. Here we additionally look at the high frequency MOM data also. Here is what we read from the MOM data.

Core Sector Component	Weight	Apr-24 (YOY) %	Apr-24 (MOM) %	FY25 Cumulative (%) #
Coal	10.3335	+7.51%	-32.29%	+7.51%
Crude Oil	8.9833	+1.65%	-3.29%	+1.65%
Natural Gas	6.8768	+8.60%	-5.58%	+8.60%
Refinery Products	28.0376	+3.94%	-6.15%	+3.94%
Fertilizers	2.6276	-0.75%	+1.04%	-0.75%
Steel	17.9166	+7.10%	-5.89%	+7.10%
Cement	5.3720	+0.62%	-11.97%	+0.62%
Electricity	19.8530	+9.41%	+3.03%	+9.41%
Core Sector Growth	100.0000	+6.15%	-8.05%	+6.15%

Data Source: DPIIT (* FY25 is just 1-months data)

For the month of April 2024, the MOM growth in core sector was decisively negative in all the 6 out of the 8 core sectors, which is the reason MOM core sector basket growth stands at -8.05%. Let us focus on the drivers of the MOM movement in April 2024 over March 2024. The positive impact on high frequency basis was led by electricity and fertilizers, with the latter bouncing from the lows. However, all the other segments of the core sector witnessed pressure on high frequency basis with coal output facing the highest resistance at -32.29% followed by cement at -11.97%. Both are short term output issues and should see a rebound after the general elections outcome is known.

CHARTING CORE SECTOR GROWTH – THE 12-YEAR ITCH

Here is a quick take on the core sector growth over the last 12 financial years from FY13 to FY24. Since FY25 is just one month, that is not considered.

Months	Overall (%)	Coal (%)	Crude Oil (%)	Natural Gas (%)	Refinery (%)	Fertilizers  (%)	Steel  (%)	Cement (%)	Electricity  (%)
2012-13(Apr-Mar)	3.82	3.19	-0.60	-14.42	7.15	-3.32	7.92	7.46	4.00
2013-14(Apr-Mar)	2.56	0.95	-0.19	-12.92	1.39	1.47	7.32	3.74	6.05
2014-15(Apr-Mar)	4.94	8.05	-0.87	-5.33	0.17	1.30	5.11	5.91	14.81
2015-16(Apr-Mar)	2.98	4.83	-1.39	-4.72	4.88	7.02	-1.28	4.62	5.69
2016-17(Apr-Mar)	4.76	3.19	-2.53	-1.03	4.89	0.21	10.74	-1.23	5.84
2017-18(Apr-Mar)	4.28	2.57	-0.90	2.86	4.58	0.03	5.57	6.33	5.32
2018-19(Apr-Mar)	4.37	7.38	-4.15	0.82	3.13	0.34	5.09	13.31	5.16
2019-20(Apr-Mar)	0.36	-0.35	-5.95	-5.64	0.22	2.67	3.36	-0.88	0.94
2020-21(Apr-Mar)	-6.39	-1.87	-5.21	-8.17	-11.22	1.65	-8.66	-10.80	-0.49
2021-22(Apr-Mar)	10.41	8.55	-2.64	19.24	8.93	0.69	16.94	20.77	7.96
2022-23(Apr-Mar)	7.80	14.84	-1.72	1.60	4.82	11.31	9.26	8.70	8.89
2023-24(Apr-Mar)	7.59	11.77	0.61	6.06	3.56	3.72	12.41	8.97	7.05

Data Source: DPIIT (FY2023-24 data is for full 12 months)

Here are the major takeaways from the core sector data trends in the last decade.

• FY24 growth is quite impressive at an upgraded 7.59%, and is only slightly lower than FY23 at 7.80%. The FY22 growth at 10.41% is not comparable since this growth was on the back of a low pandemic base. FY24 is on a very high base after 2 successive years of frenetic growth in the core sector output; and hence more appreciable.
• Here is the most important takeaway from the annualized data. From the pre-COVID levels, the infrastructure output is 21% higher and this is after factoring in the negative impact of the pandemic. In short; post-pandemic, Indian core sector has bettered pre-COVID average growth rate.
• Over the last 11 years, the average core sector growth has been around 3.62%, so at 7.59% cumulative growth in FY24, the core sector is a good 397 bps above the 10-year average. Government infrastructure capex thrust has been the major differentiating factor in this upward shift.

Last but not the least, the big story is not just about the core sector but the troika of 3 data points that are absolutely flattering for the Indian economy.

THREE DATA POINTS THAT FLATTERED THE INDIAN ECONOMY

As India goes into the exit polls on Saturday after the last phase of elections, there may be a lot of questions about the emerging political scenario. However, there is absolutely no doubts on the economic front. The Indian economy has flattered on 3 fronts.

• The core sector growth for April 2024 has come in sharply robust at 6.15%. There are two points to remember. This robust growth is on the back of a relative slowing of capex flows. Firstly, the interim budget has cut the growth in capex for FY25 to 11% from 30% in the previous two years. Secondly, the last 3 months have been quiet months on infrastructure spending and fresh outlays due to the election model code of conduct. Despite these factors, the core sector growth has been robust and that is surely a positive takeaway for the investors.
• Let us turn to the GDP growth for Q4FY24. The MOSPI has announced fourth quarter GDP growth at 7.8%, which is sharply higher than the consensus expectation in the range of 6.2% to 6.5%. Once again, the Indian economy appears to have screamed ahead of the conservative estimates and expectations of the analysts and expectations. As a result, the full year GDP growth comes in at 8.2%, reinforcing India’s position as the undisputed fastest growing large economy in the world.
• The big positive was the fiscal deficit. It may be recollected that in the interim budget, the government had reduced the fiscal deficit estimate for FY24 from 5.9% to 5.8%. Even as economists wondered if it was feasible, the actual fiscal deficit for FY24 has come in at just 5.6%, which is just about 95.3% of the revised fiscal deficit. That is an amazing boost to India’s prospects of a rating upgrade, especially after the outlook upgrade by S&P Global. This makes the 5.1% target of fiscal deficit to GDP more realistic in FY25. If you add the ₹2.11 Trillion dividend by the RBI to the government, we could end up lower than 5.1% in FY25 and possibly lower than 4.5% in FY26.

What does this troika of data mean for the RBI. The RBI must already be seriously considering rate cuts to give some relief to Indian corporates in terms of cost of funds. The situation is now perfect. A lower fiscal deficit will put less pressure on bond markets anyways and so lower rates can easily get transmitted. Also, with robust growth, rate cuts make sense (nobody cuts rates in deflation), as it is likely to be growth accretive at a faster pace